3 Regional Bank Stock Best Bets From KBW

NEW YORK ( TheStreet) -- KBW on Wednesday raised its price targets for three regional banks that carry "Outperform" ratings, with improved mortgage banking as the main theme for the first quarter.

Following KBW's universal banks first-quarter earnings preview, the firm on Wednesday published its preview for regional banks, which included a number of upward earnings estimate revisions, with implied upside from "early signs of macro-economic improvement and real estate recovery in distressed regions, in particular in the Southeast," with "less incremental impact" for banks in less-stressed regions.

With banks still facing a threat to their net interest margins -- the difference between the average yield on loans and investments and the average cost for deposits and wholesale borrowings -- in the prolonged low-rate environment, KBW said that "earnings contraction" could disappoint investors with "overly optimistic expectations."

Looking at the three banks that KBW rates "Outperform," for which the firm raised price targets on Wednesday, there is an interesting contrast for long-term investors who have strong confidence in the unfolding U.S. economic recovery. These three banks trade for at least 1.4 times tangible book value, according to HighlineFI, and multiples to consensus 2013 earnings estimates -- among analysts polled by Thomson Reuters. Multiples range from 10 to 12.5, painting quite a contrast with three of the largest U.S. banks:
  • Shares of Bank of America (BAC) closed at $9.49 on Tuesday, returning 71% year-to-date, following an epic 58% decline during 2011. Despite that remarkable run, the shares trade for just 0.7 times the company's Dec. 30 tangible book value of $12.95, and for a relatively low nine times the consensus 2013 EPS estimate of $1.06. KBW analyst Jefferson Harralson rates Bank of America "Market Perform," with a price target of $9.00, and estimates the company will report first-quarter EPS of six cents, followed by full-year earnings of 65 cents, and 2013 EPS of $1.20.
  • Citigroup (C) closed at $36.37 Tuesday, returning 38% year-to-date, following last year's 44% decline. Like Bank of America, Citi's shares are heavily discounted, at just 0.7 times the Dec. 30 tangible book value of $49.81. The shares trade for eight times the consensus 2013 EPS estimate of $4.70. KBW analyst David Konrad rates Citi "Market Perform," with a price target of $42, and estimates the company will report first-quarter EPS of 80 cents, with full-year earnings of $3.40 for 2012, followed by 2013 EPS of $4.40.
  • Shares of JPMorgan Chase (JPM) closed at $45.42 Tuesday, returning 38% year-to-date, following a 20% decline during 2011. The shares trade for 1.5 times tangible book value, and for eight times the consensus 2013 EPS estimate of $5.52. Based on a quarterly payout of 30 cents, the shares have a dividend yield of 2.64%, and the company's board of directors has authorized $12 billion in share buybacks for 2012, followed by another $3 billion for the first quarter of 2013. Konrad rates JPMorgan "Outperform," with a price target of $52, estimating the company will post first-quarter earnings of $1.07, followed by EPS of six dollars.

The following are quick summaries for the three regional banks rated "Outperform" by KBW, for which the firm raised price targets on Wednesday.

Citizens Republic Bancorp
Shares of Citizens Republic Bancorp of Flint Mich., closed at $15.87 Tuesday, returning a whopping 39% year-to-date, following a whopping 85% return during 2011.

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The shares underwent a 1-for-10 reverse split on July 5, 2011.

The company had $9.5 billion in total assets as of Dec. 30.

Citizens Republic owes $300 million in federal bailout funds received through the Troubled Assets Relief Program, or TARP, and has deferred its last eight quarterly dividends to the government. CEO Cathleen Nash said in a letter to shareholders on Feb. 29 that "we expect to pay the accrued dividends on our trust preferred and TARP obligations. We also continue to explore options to repay TARP in the most shareholder friendly way possible, though no firm timetable has been established to do so."

A big hope for the company's shareholders is its "deferred tax asset, which was valued at $311 million at year end," according to Nash. Now that the company has been profitable for three quarters, it is looking to "reverse the valuation allowance in 2012," with Nash estimating that "our current valuation allowance would have the effect of increasing our tangible common equity by over 76% as of December 31, 2011."

The shares trade for 1.6 times tangible book value, according to HighlineFI, and for 12.5 times the consensus 2013 earnings estimate of $1.27, among analysts polled by Thomson Reuters.

KBW on Wednesday raised its price target for Citizens Republic by a dollar to $16, while leaving its first-quarter EPS estimate of 30 cents, and its 2012 estimate of $1.15 unchanged. KBW raised its 2013 EPS estimate by a nickel to $1.40, "primarily due to our expectation for the company to raise common equity at a more attractive price when it exits TARP."

KBW's earnings estimates "assume the company raises $100 million of common equity at $16 per share (versus our previous estimate of $14), which represents approximately 85% of expected tangible book value .

Interested in more on Citizens Republic Bancorp? See TheStreet Ratings' report card for this stock.

Fifth Third Bancorp
Shares of Fifth Third Bancorp ( FITB) of Cincinnati closed at $14.58 Tuesday, returning 15% year-to-date, following an 11% decline during 2011.

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The shares trade for 1.4 times tangible book value, and for 10 times the consensus 2013 EPS estimate of $1.52.

The company last Wednesday announced that the initial public offering of its Vantiv ( VNTV) payment processing subsidiary resulted in Fifth Third retaining "39 percent of Vantiv's future earnings."

After tax, Fifth Third's first-quarter gains from the Vantiv sale will total $roughly $71 million.

Fifth Third on March 14 announced that the Federal Reserve had rejected its plan to increase its quarterly dividend from the current payout of eight cents, and also objected to common share buybacks, except for "the repurchase of common shares in an amount equal to any after-tax gains realized by Fifth Third from the sale of Vantiv, Inc. common shares by either Fifth Third or Vantiv."

Based on the eight-cent quarterly payout, the shares have a dividend yield of 2.19%.

KBW on Wednesday raised its price target for Fifth Third to $16 from $15, while raising its first-quarter earnings estimate by four cents, to 35 cents a share. KBW also raised its 2012 EPS estimate by seven cents to $1.42, and its 2013 estimate by a nickel to $1.55.

KBW raised the estimates "primarily to reflect stronger mortgage banking revenues and lower credit costs," while adding that "the largest risk to our price target is the flattening of the yield curve and the pressure on net interest margins."

Interested in more on Fifth Third Bancorp? See TheStreet Ratings' report card for this stock.

U.S. Bancorp
Shares of U.S. Bancorp ( USB) of Minneapolis closed at $31.59 Tuesday, returning 18% year-to-date, following a 2% return during 2011.

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The shares trade for 2.9 times tangible book value and for 111 times the consensus 2013 EPS estimate of $2.96. The high valuation to book reflects the company's very strong earnings relative to peers, with quarterly returns on average assets steadily increasing from 1.38% to 1.62%, during 2011.

The company on March 14 announced that it would increase its quarterly dividend to 19.5 cents from 12.5 cents, and that its board of directors had authorized the repurchase of up to 100 million common shares. Based on the new dividend payout, the shares have a dividend yield of 2.47%.

KBW on Wednesday raised its price target for USB by two dollars to $37, while also raising its first-quarter EPS estimate by a penny to 65 cents. The firm also raised its 2012 EPS estimate by two cents to $2.77, while leaving its 2013 estimate unchanged, at $3.15.

The 2012 estimates were increased "primarily to reflect stronger mortgage banking revenues," and KBW added that "the largest risk to our price target is the flattening of the yield curve and the pressure on net interest margins."

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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